Next video:
Loading the player...

Earnest money is a deposit made by a buyer to an intermediary to show his or her seriousness to follow through with an agreed-on transaction.

In real estate, a buyer pays earnest money when a seller accepts his offer and the buyer signs a purchase agreement. The buyer usually gives the money to the title company; or in some states the broker, who puts it into an escrow account until the deal is finalized. At that time, the money is applied to the buyer’s payment.

If the deal falls through, there is usually a provision in the purchase agreement stating which party gets the earnest money. As a rule of thumb, if the failure is the seller’s fault, the buyer will get it back. If it is the buyer’s fault, the seller will keep it.

The amount charged as earnest money varies with the real estate market conditions.

Joe sold a house in a hot market for $500,000. He asked for 2%, or $10,000, as earnest money. The first buyer who offered him full price and the earnest money was accepted. When the bank approved the financing, the $10,000 was applied to the buyer’s payment.

Four years later, Joe bought a house for $500,000 in a slow market. The seller asked him for 1% as earnest money, or $5,000. A few days later, Joe found a problem with the house and backed out. As per the purchase agreement, his earnest money was refunded.

Related Articles
  1. Investing

    Contingency Clauses In Home Purchase Contracts

    Here, we introduce widely used contingency clauses in home purchase contracts and how they can benefit both Buyers and Sellers.
  2. Investing

    Ins And Outs Of Seller-Financed Real Estate Deals

    Seller financing works like this: Instead of a buyer receiving a loan from a bank, the person selling the house lends the buyer the money for the purchase.
  3. Investing

    Home Sale Contingencies: What Buyers And Sellers Need to Know

    Home sale contingencies protect buyers who want to sell one home before purchasing another. Find out what buyers and sellers need to know about these contractual conditions.
  4. Investing

    Playing Hardball When Selling Your Home

    Using these strategies will help you get more cash when selling your house.
  5. Investing

    Rent-to-Own Homes: How the Process Works

    A rent-to-own agreement, also called a lease option or lease-to-own agreement, offers an alternative way to buy a home.
  6. Investing

    Understanding The Escrow Process

    Learn the 10 steps that lead up to closing the deal on your new home and taking possession.
  7. Investing

    The Top 4 Worries That Keep Homebuyers Up at Night

    What are the top four things homebuyers worry most about? Money, money, money, money.
  8. Small Business

    7 Steps To Selling Your Small Business

    Money in the bank and newfound free time make this grueling process worth the trouble.
  9. Investing

    7 Must-Have Real Estate Contract Conditions

    It's a good idea to educate yourself on the not-so-obvious parts of a real estate contract.
Hot Definitions
  1. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  2. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  3. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  4. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  5. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  6. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
Trading Center